Investor’s Nemesis: Inflation

Two months ago, I was discussing investments with my banker, and the options I had available in this age of low rates. He casually mentioned one of his new bank products: a bond in Singapore Dollars that would offer 2.5% yearly. I reminded him that Singapore’s inflation was over 3%… in other words, I would actually loose money by investing in the bond!

It is interesting that a lot of, if not most, people do not think of inflation when considering investments and savings. This is a big mistake as in my previous anecdote, it can turn a profitable investment into a loosing one. It is a mistake encouraged by the whole financial industry as most performance numbers (stock index, fund performance, etc.) are given in nominal currency rather than inflation adjusted, making the numbers look bigger than they really are. Regular people will do this too, claiming they have made “this much money” by buying a house 30 years ago for pennies and selling it today. Yes, but how much are those pennies worth in today dollars?

Continue reading Investor’s Nemesis: Inflation